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Capital and Operating Leases

1. According to GAAP (the generally accepted accounting principles), some leases must be recorded as a purchase. What is the basis for this treatment?
a. a lease of this type effectively conveys the same benefits and risks to the lessee as it would an owner of the property
b. the lease must be recorded in accordance with the concept of cause and effect
c. the lease provides the use of the leased asset to t he lessee for a limited period of time
d. it is an example of form over substance

2. Which of the following is one of the four general criteria for a capital lease?
a. the present value of the minimum lease payments equals or exceeds 50 percent of the property's fair market value
b. the present value of the minimum lease payments equals or exceeds 75 percent oif the property's fair market value
c. the present value of the minimum lease payments equals or exceeds 90 percent of the property's fair market value
d. the present value of the minimum lease payments equals or exceeds the property's fair market value

3. In an operating lease, how should the monthly rental payments be recorded?
a. they should be split between interest expense and depreciation expense
b. they should be recorded as rental expense
c. they should be recorded a s a reduction in the liability for the leased assets

4. Which of the following is one of the four criteria for recording a lease as a capital lease?
a. The term of the lease must be equal to or greater than the estimated economic life of the property.
b. The term of the lease must be equal to or greater than 90 percent of the estimated economic life of the property
c. The term of the lease must be equal to or greater than 50 percent of the estimated economic life of the property
d. The term of the lese must be equal to or greater than 50 percent of the estimated economic life of the property.

Solution Preview

According to US GAAP, a lease is a capital lease if any one of the following criteria apply:
- The lease transfers ownership of the leased assets to lessee at the end of the term;
- The lease contains a bargain purchase option;
- The lease term is 75% of the expected useful life of the leased assets; or
- The ...

Solution Summary

The solution explains the concepts of capital and operating leases in detail

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